Comwezi Security Services (Pty) Ltd v Cape Empowerment Trust Ltd (759/11) [2012] ZASCA 126 (21 September 2012)

In this case, Comwezi Security Services (Pty) Ltd (the first appellant) borrowed R4 million from Cape Empowerment Trust Limited (CET, the respondent). The repayment of this loan was secured by a cession and pledge of 20 shares in Comwezi, held by the Grapsy Trust, with Mr. Mohammed Shaffie Mowzer (the second appellant) acting as the trustee for the Grapsy Trust. The loan was not repaid by the agreed deadline of 30 April 2009. Consequently, on 8 June 2010, the parties entered into a settlement agreement, according to which the loan would be settled through the issuance of 25 shares in Comwezi to CET.

The settlement agreement included a resolutive condition that required CET to conduct a due diligence investigation of Comwezi within three months. If this condition was not met, the agreement would lapse, and the parties would revert to their positions under the original loan agreement. However, CET was granted the right to waive or "relax" this resolutive condition. CET extended the deadline for fulfilling this condition 13 times, citing Comwezi's failure to cooperate with the due diligence process and provide necessary documents. The central issue in the appeal was whether these extensions were valid or if the failure to meet the original condition meant the settlement agreement had lapsed. The High Court had previously ruled that the extensions were permissible and that the agreement remained in force, compelling Comwezi to cooperate with the due diligence investigation. This decision was appealed by Comwezi.

The court held that interpretation of contractual provisions must consider the language used in the context of the entire document and the circumstances surrounding its creation. The objective is to ascertain a sensible meaning that aligns with the document's apparent purpose, avoiding interpretations that lead to unreasonable or unbusinesslike outcomes. In this case, the court determined that the only meaningful way to exercise the power to "relax" the resolutive condition was by extending the time frame for its fulfillment. This interpretation was supported by the fact that the parties' subsequent conduct aligned with this understanding, reinforcing the court's conclusion.

The court considered the subsequent conduct of the parties in implementing the agreement as a factor in interpreting the disputed provision. The court noted that historically, when there was perceived ambiguity in a contract, the parties' conduct in implementing the agreement could be taken into account in preferring one interpretation over another. However, the court highlighted that in the present case, the consideration of subsequent conduct was not limited to situations of ambiguity.

The court held that under the current approach to interpretation, all relevant context should be taken into account, irrespective of whether there is perceived ambiguity in the contract. The court explained that the conduct of the parties in implementing the agreement provides clear evidence of how reasonable business people, in the same circumstances and with the same knowledge, would interpret the disputed provision.

The court clarified that the parties' conduct can assist in objectively determining the meaning of the words used in the contract and in selecting the appropriate meaning from among those proposed by the parties. However, the court also noted that if the parties' conduct is inconsistent with any possible meaning of the language used in the contract, it cannot be used to give that language an otherwise impermissible meaning. In such cases, the conduct may be relevant to a claim for rectification of the agreement or may establish an estoppel, but it does not alter the proper construction of the provision under consideration.

Therefore, in this case, the court considered the subsequent conduct of the parties as a relevant factor in interpreting the disputed provision, as it provided insight into how the parties themselves understood and implemented the agreement.

In its reasoning process, the court referred to several cases to support its interpretation of contractual provisions and the principles of contract law. One of the key cases cited was Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] ZASCA 13; 2012 (4) SA 593 (SCA); [2012] 2 All SA 262 (SCA).

This case is particularly significant as it restates the correct approach to the interpretation of documents, highlighting that interpretation involves attributing meaning to the words used in a document, considering the context provided by reading the particular provision in light of the document as a whole and the circumstances attendant upon its coming into existence. The court in the Natal Joint Municipal Pension Fund case highlighted that the process is objective, not subjective, and that a sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results.

The principles outlined in the Natal Joint Municipal Pension Fund case were applied in the Comwezi Security Services (Pty) Ltd v Cape Empowerment Trust Ltd case to determine the meaning and scope of the power to "relax" a resolutive condition within a settlement agreement, ultimately influencing the court's decision.